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Tuesday, 11 August 2015

Dr. R. Evan Ellis, PhD: China and Costa Rica A New Beginning?

About the Author

Dr. Evan R. Ellis is a research professor of Latin American Studies at the U.S. Army War College Strategic Studies Institute with a focus on the region’s relationships with China and other non-Western Hemisphere actors. He holds a PhD in political science with a specialization in comparative politics.

In July 2014, Costa Rican president Luis Guillermo Solis met in Brasilia with his Chinese counterpart, Xi Jinping, as part of the first summit between the Peoples Republic of China (PRC) and the forum of Latin American and Caribbean states known as CELAC (Comunidad de Estados Latinoamericanos y Caribeños, in English The Community of Latin American and Caribbean States). Although the meeting between the two presidents received little attention beyond Central America, it was significant as the first official encounter between the two leaders following the unexpected victory of Mr. Solis as the dark-horse candidate in the April 2014 presidential run- off election. The meeting was even more significant in that controversy over major proposed projects involving Chinese companies in Costa Rica had arguably contributed to a sense of frustration among Costa Rican voters with the previous governments of the National Liberation Party (PLN) and their corresponding receptivity for the “ethics and transparency” message of Solis.

The meeting between Presidents Xi and Solis was impor- tant in demonstrating that both sides could continue to work together, even if issues that President Solis raised concern- ing the Chinese projects demonstrated that the tone of the relationship would not be the same as it had been under the governments of his predecessors Oscar Arias and Laura Chin- chilla.

On the positive side, the Xi-Solis meeting effectively cre- ated a space for restructuring and re-launching the projects that had been the subject of controversy during the electoral campaign, including the expansion of the petroleum refin- ery complex at Moin, and improvements to Route 32 be- tween the capital city of San Jose and the port city of Limon. Still, the brief meeting produced no reason to believe that a compromise could be ultimately reached that would be ac- ceptable for both sides. Moreover, in the months following elections, the new Solis government had little success in mo- bilizing the fragile coalition of parties that backed him in the Costa Rican National Assembly to pass new legislation, sug- gesting that movement on controversial new projects with the PRC would be highly complicated.

Costa Rica is currently at a crossroads in its relationship with the PRC. There have been two changes of government in the country since 2007 when then-president Oscar Arias briefly made the nation a center of attention in the region by switching Costa Rica’s diplomatic recognition from Tai- wan to the PRC. While the PRC may continue to look with favor on Costa Rica today for being the first nation in Cen- tral America to establish relations with it, the residual debt of Chinese gratitude is arguably much diminished from what it was when Oscar Arias changed the country’s diplomatic pos- ture more than seven years ago. Reciprocally, while Costa Rica’s current President Solis is not inherently anti-Chinese (and indeed has some Chinese ancestry), he is a U.S.-educat- ed academic whose career has given him a deep personal commitment to ethics and the rule of law. He is not inher- ently disposed to modify Costa Rica’s legal or administrative framework to accommodate Chinese companies in order to court favor with the PRC government.

During the July 2014 Xi-Solis meeting, the two presidents agreed to a period of five months in order to re-plant the Route 32 project. The next scheduled face-to-face meeting between the leaders occurred when Solis traveled to Bei- jing in January 2015 for the most recent China-CELAC sum- mit, as part of the group of Presidents representing CELAC. Thus if major progress can be made on Chinese projects in the country, the January China-CELAC summit was a logical place for the “good news” to be announced.

Beyond the Moin refinery and Route 32 projects, a major initiative of the previous Costa Rican government of Laura Chinchilla that has persisted in the Solis administration is the proposal to establish five Special Economic Zones (SEZs) in the country, supporting investments by Chinese companies with financing from Chinese institutions such as China De- velopment Bank (CDB). The plan was presented by the out- going Chinchilla administration, literally three days before having to vacate their government offices (to accommodate the entry of the newly elected Solis government’s team). For this reason, it was perceived at the time by many in Costa Rica to be “dead on arrival.” Yet despite such pessimism, the Solis administration has continued to develop the concept launched by its predecessor. Indeed, China Development Bank has indicated its willingness to mount a feasibility study for the establishment of five zones: a hub site in Puntarenas, and satellite zones in Limón, Turrialba, San Carlos and Libe- ria, with the government hoping to announce the first Chi- nese investors with a declared interest in participating in the zones by June 2015.

Although the granting of special zones to Chinese com- panies, with associated tax breaks and other incentives,

could be difficult in the present political environment, Costa Rican political analysts interviewed for this report note that similar zones were created for Taiwanese companies in the past without problems. Moreover, the cessation of computer chip production in Costa Rica by the technology giant Intel is likely to increase both political and economic pressures for the government to attract some type of investment to the country to compensate for the loss.

At least one of the two controversial projects involving Chinese companies in Costa Rica mentioned in the opening paragraph, the improvement of Route 32, has a reasonable chance of going forward. Per the timetable established dur- ing the Xi-Solis meeting in July 2014, Costa Rica’s Ministry for Public Works has submitted a counterproposal for the project to China Harbour and China Development Bank, pro- posing that at least 60% of the workers on the project to be Costa Rican, and retaining the immunity of the Costa Rican government in the relationship.

The Moin Refinery, while arguably facing greater obsta- cles than the Route 32 project, nonetheless appears to retain some possibility of going forward. At the end of November 2014, Sara Salizar, the new President of the Costa Rican state petroleum organization Recope, traveled to China to discuss the path forward for the deal. However, her expressions of continued interest in its realization, have not necessarily overcome concerns over the project within the Comptroller General’s office.

Another area in which short-term progress between Chi- na and Costa Rica is possible is in phytosanitary protocols for control of plant diseases agricultural exports. The Chinese and Costa Rican governments currently have negotiations in progress for protocols that would facilitate Costa Rican ex- ports of pineapple, yucca, shrimp and tuna. The cost and spoilage associated with shipping Costa Rican fruits and veg- etables to the other side of the world arguably limits the po- tential for such exports to penetrate the Chinese market. This is particularly relevant in the face of competition from simi- lar offerings from closer sources such as the Philippines. Yet such certifications will nonetheless likely contribute to some additional exports in the luxury market segment, as well as helping Costa Rican businessmen to continue to make con- nections and increase their knowledge, potentially making them more effective in penetrating the Chinese market.

On the other hand, other projects remain stalled or com- pleted with less success than expected, testifying to the con- tinuing difficulty for the Chinese of doing business in Costa Rica. Perhaps the best example is Costa Rica’s Chinatown, the widespread criticism of which within Costa Rica was ar- guably one of the final nails in the coffin in the Presidential candidacy and political career of San Jose mayor Johnny Araya. The district, established with financial assistance from the PRC government, with an entrance marked by an orna- mental arch built by Chinese workers, has failed to attract a significant number of either tourists or Chinese shopkeepers. Among the persons interviewed in Costa Rica for this report, it was viewed almost universally as a less-than-successful venture.

Another important question shaping Costa Rica’s en- gagement with the PRC is the country’s potential formal en- try into the Pacific Alliance. Although President Solis, as can- didate, expressed reservations about the organization, since assuming the Presidency he has adopted a more positive tone, committing to study the matter. Even more positively, Foreign Minister Manuel González Sanz has also expressed a favorable opinion towards Costa Rica’s eventual joining. While the current finalization of a free trade accord between Costa Rica and Colombia represents a minor obstacle to the treaty, additional pressure comes from Panama, which has indicated that it would probably join the alliance. This raises the danger of leaving Costa Rica outside of the group of na- tions affirming commitment to a market-oriented approach to participation in the new Pacific economy.

Also uncertain is to what extent the Solis government will go beyond the current focus on trade and investment in its engagement with the PRC. All of Costa Rica’s ambassadors to China, in one form or another, have been businessmen. To date, Costa Rica has been notably reluctant to engage with the PRC on values-based issues or topics where there might be discord between the two countries such as Tibet, or ques- tions of human rights. Even themes such as the opening of a Taiwan commercial representative office in the country, such as those established in the United States and other major Western countries, has been absent, arguably due to the de- sire of the Costa Rican government not to offend the Chinese government and thus jeopardize access to the Chinese mar- ket and other benefits.

To the extent that the Costa Rica-China relationship has touched on themes beyond economics, one small but impor- tant theme has been security cooperation. The PRC govern- ment has donated 350 cars to the Costa Rican national police, although more than half of them were out of service within months of their delivery because of mechanical failures and a lack of spare parts. The Chinese government has also com- mitted to the construction of a new police training facility in Pococí, in the province of Limon, although the project has been slow to get off the ground. It has also committed to the training of police officers, although some have expressed concern whether such influence could have a negative influ- ence on the respect for civic rights among Costa Rican police officers within Costa Rica as a democratic society.

Whatever the resolution of such issues, some level of law enforcement cooperation between China and Costa Rica will become increasingly important in facing challenges from ex- panding transpacific organized crime, including the smug- gling of persons, precursor chemicals for drugs, and money laundering. Combating these matters will require technical cooperation between the two nations as well as translators with capabilities in Hakka, Cantonese, and Mandarin, as well as greater sharing of data on criminals and groups.

As noted previously, an important factor in the evolution of the China-Costa Rica relationship, in both economic and political terms, is the current impasse in the Costa Rican

political system, which has inhibited President Solis’ ability to take projects forward in general. His own party the Citizen’s Action Party (PAC), only has 13 of the 57 seats in the National Assembly, and depends on a loose coalition with the center- right Social Christian party (PUSC) and the leftist Frente Amplio (FA) party for its governing majority. The PUSC, once one of Costa Rica’s two dominant parties, arguably hopes to use its role in the current government to return to power in the national elections of 2018. The PUSC is likely to become even less cooperative with President Solis and the PAC as the government’s political position worsens, creating a potential downward spiral that could deepen government paralysis in the coming months.

The leftist Frente Amplio has its own aspirations to capture power in 2018 under candidate José María Villalta, similarly limiting their incentives to assist the success of a moderate coalition with the PAC and PUSC, so long as their greater rival, the National Liberation party (PLN) remains weak. Although Frente Amplio is a left-of-center party, this does not make it inherently disposed to support initiatives by the Solis govern- ment to contract with Chinese companies or improve political relations with the PRC. The party’s leftist core was forged dur- ing the Cold War in the Soviet-Cuban tradition, at a time when the Chinese were viewed with distrust, and arguably retains mixed feelings in its orientation toward the PRC today.

Further complicating matters, the PAC itself is split, with its founder Ottón Solís, who took a position highly critical of col- laboration with China, now occupying a position within the National Assembly from which he serves as a political rival to President Solis, a source of political pressure from within the party limiting the President’s ability to move too quickly to embrace the PRC, or to take projects with Chinese companies forward, particularly those seek to lack sufficient transpar- ency, participation of Costa Rican businesses, or questionable terms.

For the United States, the evolving Costa Rica-China re- lationship offers an opportunity to explore, on a small scale, effective new engagement strategies in the context of a re- gion that cannot and should not be blocked from develop- ing relationships with the PRC and other actors beyond the hemisphere. Indeed, Costa Rica arguably presents a complex situation in which the ability of the United States to engage the country over its commercial and political relationship with the PRC could go well or badly, depending on the astuteness, sensitivity, and creativity with which the issue is handled. Costa Rica is unique in Central America in having both a for- mal political relationship with the PRC and a socialist political party as part of its governing coalition on one hand, while on the other hand, being a country with a U.S.-educated Presi- dent and politicians generally favorably disposed toward the United States, as well as a strong rule-of-law tradition and a principled leader.

The challenge for the United States is to retain a respectful engagement with Costa Rica that provides real value added to the country’s engagement with China, helping the latter realize the greatest commercial and other benefit from the relationship, true to Costa Rica’s tradition of having some of Central America’s strongest institutions. While doing so might extend to three-way collaboration with Costa Rica and China in matters of trans-Pacific crime, the United States probably should concentrate on supporting Costa Rica’s economic en- gagement, where desired, and to listening prior to advising. The respectful and constructive relationship that the United States has already begin with both the Solis government and the leftist Frente Amplio party is arguably a good move in this direction.

The meeting between Costa Rican President Luis Guill- ermo Solis and his Chinese counterpart Xi Jinping during the January 2015 China-CELAC summit in Beijing gave some indication regarding whether the new Costa Rican govern- ment’s attempt to re-set its relationship with the PRC is bear- ing fruit, or is following a path toward disappointment. Costa Rica became a leader in Central America with its 2007 shift in diplomatic recognition to the PRC. Its new government now has the opportunity to demonstrate that even a small Latin American nation can develop a mutually beneficial relation- ship with the PRC based on adherence to principle, consistent with a strong relationship with the United States. As in 2007, Costa Rica’s Central American neighbors will be attentive to the outcome.